Labarbera v. Sec. Nat'l Ins. Co.

86 Cal.App.5th 1329

303 Cal.Rptr.3d 256

Chris LABARBERA, et al., Plaintiffs and Appellants,

v.SECURITY NATIONAL INSURANCE COMPANY, Defendant and Respondent.

C093414

Court of Appeal, Third District, California.

Filed December 28, 2022

Lerch Sturmer, Jerome N. Lerch, San Francisco, and David W. Lerch for Plaintiffs and Appellants.

Nielsen Katibah, James C. Nielsen and Daniel N. Katibah for Defendant and Respondent.

Duarte, Acting P. J.

This case involves a dispute over insurance coverage. Plaintiff and appellant Chris LaBarbera hired Richard Knight dba Knight Construction (Knight) to remodel a house pursuant to a contract that provided Knight would defend and indemnify LaBarbera for all claims arising out of the work. Knight obtained a general liability insurance policy from defendant and respondent Security National Insurance Company (Security National) that covered damages Knight was obligated to pay due to bodily injury to a third party. As relevant here, the policy also covered Knight's "liability for damages ... [a]ssumed in a contract or agreement that is an ‘insured contract.’ " Security National acknowledges the indemnity provision in Knight's contract with LaBarbera is an "insured contract" within the meaning of the policy. The policy also provides, "If we defend an insured [i.e., Knight] against a suit and an indemnitee of the insured [i.e., LaBarbera] is also named as a party to the suit, we will defend that indemnitee" if certain conditions are met.

During the remodeling work, a subcontractor suffered catastrophic injuries, and sued both LaBarbera and Knight. LaBarbera's liability insurer (plaintiff and appellant Underwriters)¹ defended him in that lawsuit, and Security National defended Knight. LaBarbera also tendered his defense to Knight and to Security National, but they either ignored or rejected the tender. After settling the underlying lawsuit for $465,000, LaBarbera and Underwriters sued Knight and Security National, seeking to recover the full $465,000 settlement amount and over $100,000 in expenses and attorney fees incurred defending LaBarbera in that lawsuit.

Security National moved for summary judgment on the ground that all claims against it were barred because the undisputed facts established it did not have an obligation to defend or indemnify LaBarbera. The trial court granted the motion and entered judgment in favor of Security National.

LaBarbera and Underwriters timely appealed, and we now affirm, although we adopt different reasoning than the trial court. As we will explain, we agree with Security National that the indemnitee defense clause in Knight's general liability insurance policy did not bestow third party beneficiary rights on the indemnitee, LaBarbera, who benefitted only incidentally from the clause. Because LaBarbera is not a third party beneficiary under Knight's policy, he is precluded from bringing a direct action against Security National.

FACTUAL AND PROCEDURAL BACKGROUND

The Construction Contract

In June 2016, LaBarbera hired Knight to remodel a house that LaBarbera owned in Carmichael, California. The contract between Knight and LaBarbera (hereafter, the "construction contract") contains the following indemnity provision: "Contractor [i.e., Knight] shall indemnify Client [i.e., LaBarbera] against, hold it harmless from and defend Client from all claims, loss, liability, and expense, including actual attorney's fees, arising out of or in connection with Contractor's Services performed under this Contract. This indemnity shall be provided even if Client is partly responsible for the claim, damage, injury or loss, but Contractor shall not provide indemnity against claims or losses deemed to be caused by the sole negligence or willful misconduct of Client or Client's agents or employees." In other words, Knight agreed to indemnify and defend LaBarbera from all claims arising out of the remodeling work, unless the claims were caused by LaBarbera's sole negligence or willful misconduct.

Knight's Insurance Policy

Knight obtained a general liability insurance policy from Security National to cover his work on LaBarbera's remodeling project. Knight was the "insured" under the policy, and it is undisputed that LaBarbera was not named as an additional insured. The policy contains a $1 million per occurrence limit, and provides, "We will pay those sums that the insured [i.e., Knight] becomes legally obligated to pay as damages because of bodily injury .... We will have the right and duty to defend the insured against any suit seeking those damages."² We note that defense costs (i.e., amounts spent by the insurer defending the insured against a suit, including attorney fees) are considered supplementary or additional payments, and do not reduce the policy limits available to settle the suit or pay an adverse judgment. (See Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2021) ¶ 7.502.1, p. 7B-2.) So, for example, if Knight were sued for injuries arising out of the remodeling work and a $1 million judgment was entered against him, and if Security National also incurred $500,000 in defense costs, it would pay both the $1 million judgment and all defense costs (because the defense costs would not reduce the $1 million policy limit).

The policy expressly excludes coverage for "[b]odily injury ... for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." As relevant here, however, the policy also provides: "This exclusion does not apply to liability for damages [¶] ... [¶] [a]ssumed in a contract or agreement that is an insured contract .... Solely for the purposes of liability assumed in an insured contract, reasonable attorney fees and necessary litigation expenses incurred by or for a party other than an insured are deemed to be damages because of bodily injury ...." (Italics added.) We will refer to this as the "insured contract exception." An "insured contract" is defined as "[t]hat part of any ... contract or agreement pertaining to your business ... under which you assume the tort liability of another party to pay for bodily injury ... to a third person ...." Security National acknowledges the indemnity provision in the construction contract is an insured contract within the meaning of the policy. Thus, under the insured contract exception, the policy covers Knight for liability he assumed pursuant to the indemnity provision in the construction contract, but defense costs incurred by the "party other than the insured" (here, LaBarbera) are treated as "damages because of bodily injury" and thus reduce the policy limits available to settle the underlying claim or pay an adverse judgment. (See Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2021) ¶ 7:1475.3, p. 7E-48.)

The policy also contains a clause in the "Supplementary Payments" section that provides: "If we defend an insured against a suit and an indemnitee of the insured is also named as a party to the suit, we will defend that indemnitee if all of the following conditions are met: [¶] a. The suit against the indemnitee seeks damages for which the insured has assumed the liability of the indemnitee in a contract or agreement that is an insured contract; [¶] ... [¶] d. The allegations in the suit and the information we know about the occurrence are such that no conflict appears to exist between the interests of the insured and the interests of the indemnitee; [¶] e. The indemnitee and the insured ask us to conduct and control the defense of that indemnitee against such suit and agree that we can assign the same counsel to defend the insured and the indemnitee[.] [¶] ... [¶] So long as the above conditions are met, attorneys’ fees incurred by us in the defense of that indemnitee, necessary litigation expenses incurred by us and necessary litigation expenses incurred by the indemnitee at our request will be paid as Supplementary Payments. [And], such payments will not be deemed to be damages for bodily injury ... and will not reduce the limits of insurance." We will refer to this as the "indemnitee defense clause." As just noted, it provides Security National will defend the insured's indemnitee (here, LaBarbera) if certain conditions are met. If those conditions are met and Security National assigns the same counsel to defend both Knight and the indemnitee, then the indemnitee's defense costs "will not be deemed to be damages for bodily injury ... and will not reduce the limits of insurance." As Security National explains, "When the various conditions can be met, ... it is to Knight's advantage for Security National to extend a defense to his ... contractual indemnitee through a single defense attorney, because doing so will not reduce Knight's available indemnity limits."

The Accident and the Paz-Ramirez Litigation

Knight hired a subcontractor to perform the stucco work on LaBarbera's remodeling project, and the subcontractor hired Nicolas Paz-Ramirez. In September 2016, Paz-Ramirez was electrocuted by a live wire while performing stucco work and suffered catastrophic injuries. As relevant here, Paz-Ramirez sued Knight and LaBarbera for damages based on negligence and premises liability theories. We refer to this as the Paz-Ramirez litigation.

Security National defended Knight in the Paz-Ramirez litigation. Knight filed an answer generally denying the allegations in the complaint. Knight also asserted several affirmative defenses, including: (1) "that other Defendants in this lawsuit ... were themselves responsible for the Plaintiff's damages" and that any liability should "be assessed in proportion to the liability of other co-Defendants"; and (2) that if Knight were found liable to Paz-Ramirez, "such liability in whole or in part will be the direct or imputed fault and responsibility of other parties to this litigation."

LaBarbera had his own premises liability insurance policy covering the house that Knight...